This article appears in the February 2005 issue of Pharma Patent Bulletin.
The End of Pharmaceutical Parallel Imports?
Pharmaceutical companies have traditionally attempted to curtail the activities of parallel importers by claiming that their activities infringe intellectual property rights in the country of import. They may have more success through other means, and below, I consider the Opinion of the Advocate General in Syfait/GlaxoSmithKline1; , an opinion which must worry both parallel importers, and other purchasers.
Parallel imports of pharmaceuticals have existed since the inception of the European common market. Wherever there are sufficient price differentials to make movement of goods economically viable, and a regulatory framework which permits it, parallel trade will exist. In the case of pharmaceuticals, there are still important price differentials between countries, and goods are relatively inexpensive to transport. Costs of marketing pharmaceutical parallel imports are fairly high - it is a closely regulated industry with rigourous standards and regulatory requirements, but there is still enough margin to make the practise worthwhile, and parallel trade in pharmaceuticals has grown consistently throughout the UK and other European countries. Recent developments will check that growth.
Free Movement of Goods and Exhaustion of Rights
The Treaty of Rome, establishing the European common market, describes certain 'fundamental freedoms' which are seen as an integral part of the single market. One of these is the free movement of goods. Article 28 of the EC Treaty gives effect to this :
'Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States'.
Article 30 of the Treaty states
'Art. 28 … shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of … the protection of industrial or commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States'
The principle of exhaustion of rights has arisen as the means of reconciling free movement of goods and the need to protect intellectual property rights. Within the EEA, the owner of a patent or trademark may not use his intellectual property rights to block the import of a product which has been put on the market in another Member State by him or with his consent. This principle is the basis of parallel trade, and much European caselaw has concerned the precise relationship between Article 28 and Article 30, and the extent of exhaustion.
The UK is the largest European market for pharmaceutical pharmaceutical parallel import, representing around 70% of the total European trade. The value of the UK market is estimated at £800m. Approximately 1 in 5 pharmaceutical products sold in this country is a parallel import. And parallel trade is a thorn in the side of the R & D based brand-owner companies. Such companies lose turnover to foreign affiliates, which makes sales performance difficult to determine, and can have a negative impact on company morale, and they lose profit overall, because a sale is satisfied by a lower-priced equivalent product. Naturally, brand owners would like to see parallel trade disappear, or at least reduce substantially.
Brand owners have often used their intellectual property rights to attack the ability of parallel importers to sell their goods, usually unsuccessfully. If trademark owners could cut off supplies to parallel importers, the problems caused by parallel sales would go away, and they would not need to worry about asserting their intellectual property rights.
The right to free movement of goods is supported by Articles 81 and 82 of the EC Treaty prohibiting respectively, anti-competitive agreements and abuses of a dominant position. In the Bayer2; case the ECJ considered Art 81, and decided that there was no breach of it in relation to Bayer's supply of nifedipine (Adalat) to its wholesalers. Bayer's decision to reduce supplies of nifedipine to its wholesalers was a unilateral act, not an agreement.
Brand owners have tried to reduce excess stocks held by wholesalers with a view to eliminating parallel imports. There is a raft of complaints and applications for negative clearance relating to various measures designed to have this effect (refusal to supply, partial refusal to supply, two-tier pricing) waiting to be considered by the European Commission, but the Syfait case is the first case in which the European Court of Justice ('ECJ') has had to consider the issue of an abuse of a dominant position under Art 82.
SYFAIT v GSK
The Syfait case, related to the decision by GSK's Greek subsidiary ('GSK') to stop supplying certain products to Greek wholesalers and to supply them instead directly to pharmacies and hospitals. The case is extremely important for the pharmaceutical industry, and will determine the kind of competition which operates within the pharmaceutical market. It is a measure of the importance with which the case is regarded that 60 parties joined in observations to the ECJ. Advocate General Jacobs issued his opinion late last year, and the decision of the Court is expected later this year.
The Greek government insists that pharmaceuticals are sold into the Greek market at the lowest European price. Greek wholesalers have a public service obligation, which obliges them to maintain a full and diversified stock of pharmaceutical products. The wholesalers claimed that GSK's decision to stop supplying certain products to them and to supply such products directly to pharmacies and hospitals was a breach of Article 82 of the Treaty, an abuse of GSK's dominant position. There was no argument as to dominance: the only matter before the ECJ was whether there was abuse by reason of GSK's refusal to supply.
The Greek Competition Commission considered the wholesalers' complaints. required GSK to meet orders in full, and referred certain questions to the ECJ. In essence, it asked
- Whether refusal to supply by a dominant undertaking in order to limit parallel trade was an abuse, and whether the answer was affected by the fact that pure conditions of supply do not prevail in the pharmaceutical market, but a regime governed by state intervention.
- If such limitation of parallel trade, for reasons given above, was not automatically abusive, how should abuse be assessed?
The European Commission submitted that a refusal to supply was always an abuse unless the dominant party could show objective justification for it, and that here there was no such justification. The Commission referred to GSK's desire to limit intra-brand competition in the import markets, and its desire to partition markets.
The Advocate General's Opinion
In his Opinion, the Advocate General stated that partitioning of the markets was not the primary intent of GSK, but was rather an inevitable consequence of its attempt to protect what it saw as its legitimate commercial interests. He considered that refusal to supply was not automatically abusive, and that factors which should be taken into account in considering whether there was objective justification were the regulation of price and distribution, the impact of unmoderated parallel trade on pharmaceutical undertakings, and the effect of parallel trade on consumers and purchasers of pharmaceutical products. In trying to inhibit parallel trade, pharmaceutical companies were not trying to escape the consequences of their own differential pricing but rather, trying to avoid the consequences of prices imposed on them, and the fact that such supplies as there were had to be allocated to national trade was not of their making, but a result of the public service obligation imposed on wholesalers. Taking these factors into account, the Advocate General concluded that a restriction of supply by a dominant pharmaceutical undertaking in order to limit parallel trade was capable of justification as a reasonable and proportionate measure.
Up to now, the ECJ and European Commission have acted with the aim of realising a single market in pharmaceutical products. This opinion deviates from that aim. It has been stated as being a recognition that pharmaceuticals are a special market.
The Advocate General has based his opinion on case-law of the EC relating to the 'essential facilities doctrine' which was developed in a series of cases relating to the refusal of companies in an upstream position to supply potential competitors downstream. Those cases did not involve the partitioning of markets, and the extension of the idea that a dominant undertaking may be justified in refusing to supply to this kind of case is an unprecedented dilution of the value generally placed on the integrity of the single market, and the purpose of free movement of goods as a means to further the aim of a single market. Articles 81 and 82 of the Treaty are measures designed to support the basic freedoms of the common market and support integration. No matter how sympathetic one is with the predicament of companies unable to set their own prices, it seems to me that, bearing in mind the importance of Article 82 as a driver towards integration, and the importance of the EU in today's political and economic climate, Article 82 should not be interpreted as meaning that a dominant company can undermine the fundamental freedom of free movement of goods. In other cases concerning the free movement of goods the ECJ has not allowed the existence of price controls to justify exceptions to the basic principle. If there are distortions of competition due to state price regulation, it is those measures which should be addressed, rather than allowing exceptions to free movement of goods. If the existence of diverging state regulation becomes a justification for the parallel trade, the obstacles to the free market created by such regulation will be entrenched, rather than eliminated.
The Advocate General concluded that refusal to supply could be objectively justified, on the basis, firstly, of the effect which parallel trade has on the availability of supplies - but it was not shown that parallel imports had interrupted supplies to the Greek market - those were guaranteed by the public service obligation - rather, supplies became short after GSK imposed reductions. He also justified the reduction of parallel imports on the basis that parallel imports have a negative effect on R & D - but the evidence of this is scant. Brand Owners spend money on many things, and R & D is by no means their most important expense, and many factors impact on profit levels - and on R & D spend. And if parallel imports do have an impact on R & D spend, is it really appropriate to address this by allowing refusal to supply? Shouldn't this be addressed at a European, political level?
The Advocate General's final justification for determining that there could be an objective justification for reducing pharmaceutical parallel imports, was that they did not benefit ultimate consumers of pharmaceutical products, or the Member States which pay for them. The York Study3; does show financial benefit but more importantly, lack of social benefit should not be a reason for eliminating parallel trade. Article 28 is too important for that! If conditions for competition are lacking, that should be addressed at a European level, rather than Article 82 being weakened in order to mitigate the effects of failure to create the basic conditions needed for competition.
The ECJ usually follows the opinion of the Advocate General. To my mind, it would be better for the furtherance of European economic, political and social aims if, in this instance, it followed its consistent practise of encouraging the single market, using Article 82 to promote integration. If it does not, it seems to me that pharmaceutical parallel imports will be largely eliminated, with supplies closely tracking national needs, and the only measure of competition to patented trademarked goods will disappear. It is impossible to evaluate the extent to which parallel imports affect the price of patented pharmaceutical products, but it seems likely that they do, and with that indirect competition gone, prices may rise, and in particular, the prices of newly launched products in the UK, which allows free pricing, and other higher-priced countries. This would not be good for consumers, or the governments of Member States. And whilst this opinion considers pharmaceutical parallel imports and stresses that the pharmaceutical market is unusual in many respects, a judgment endorsing the Advocate General's opinion could also have an impact on other types of customer within the pharmaceutical market, and on other markets.
Anna McKay/February 2005
For more information on any of the above, contact me at: